Italian referendum
Frosinone, Italy - November 8, 2016 - The election campaign of Matteo Renzi for the constitutional referendum

The Italian referendum on constitutional reform is the biggest event the country has had to contend with since Matteo Renzi took office in 2014. For investors, the decision will be key – it will either significantly help, or significantly hinder, the country’s falling stock markets, bank shares and supersize public debt.

The polls currently expect the people to vote against the reforms proposed by Renzi’s government, likely leading to the resignation of Renzi himself. It is then expected that a technocratic government will take over the running of the country until a new Prime Minister can be elected – synonymous with a period of instability.

So far this year the Italian benchmark, FTSE MIB, is down around 23 percent, in comparison to the STOXX Europe 600 index’s fall of just 7 percent. The FTSE MIB is currently trading at an eight-week low as concern over the result of the referendum grows.

Trouble is also rife in Italy’s banking industry, the euro zone’s fourth largest, which is struggling with 360 billion euros in problem loans. Many are on the brink of collapse – and with most banking shareholders being the average Italian, the people will take the hit. EU regulations are making it hard for Renzi to agree a bailout which will secure both the future of the banks and the money of Italian shareholders – and without constitutional reform, domestic legislation to tackle the issue will be harder to pass.

maria elena boschi
Italy’s Minister for Constitutional Reform, Maria Elena Boschi, speaks at a campaign event

Effects outside of Italy

Whilst the referendum is undoubtedly an important decision for the country, it seems that, for now, investors don’t expect it to have repercussions outside of Italy.

The 30-day implied volatility of Italy’s stock benchmark, the FTSE MIB, rose last week to 31.3, according to Credit Suisse figures, but the Euro Stoxx 50, fell last week to 18.9. This represents the widest difference between the two indexes in two years, meaning investors are not anticipating the impact to spread further than the Italian borders.

Mandy Xu, an equity derivatives strategist at Credit Suisse, told the Wall Street Journal that the figures imply that “markets see limited contagion from the referendum.”

Political impact

The political impact of a ‘No’ vote is likely to have implications on the Europe as whole. The resignation of centre-left Prime Minister Renzi will pave the way for the anti-establishment 5 Star Movement, as the populist right wing Northern League, to gain momentum – perhaps leading to the country’s exit from Europe.

However, should a ‘No’ vote win on the 4th December, the biggest worry for Italy – and its investors – should be the people’s refusal to face the country’s problems. Thus far, the country has buried its head in the sand; significant changes are desperately needed to bolster the country’s failing finances, increase employment and spark prosperity. Renzi’s reforms – though perhaps not perfect – will represent a willingness to turn the country around and move towards a more prosperous future; a ‘No’ vote is likely to mean economic difficulties for years to come.